Bye-bye Hungary?

Gros_DanielThe benefits of austerity have already exceeded the costs of it – states Daniel Gros, one of Europe’s most prestigious economists. Gros, who is the Director of the Center for European Policy Studies and consultant of the IMF and the European Parliament, claims that Greece is just causing damages for itself by delaying the implementation of necessary reforms. On the contrary, the Baltic countries have recovered much more quickly as they have made changes in their attitude towards financial questions.

For Hungary, he suggests that it should quit the European Union and face the consequences if it is that dissatisfied with the Union. Everything that is happening now in the EU and the Eurozone will show result on five to ten years.

Zentai Peter: Most of the leading economists in world oppose the continuance of austerity directed by the Germans. You are among the very few who still stand for it. What are your arguments for continuing the austerity?

Daniel Gros: First of all, austerity is not imposed by Germany; it is imposed by the fact that the countries in question have no longer any money to spend. Southern European countries like Greece and Spain had relied for decades on getting more and more credits. Now, they do not get any more or any new ones, thus, they have to stop spending.

In Greece and Spain, it is insisted that Germany’s requirements – in exchange for new credits – are too strict and quick.

If you compare what happened in Greece to what happened in the Baltic countries, you will see that Latvia, Estonia, and Lithuania have made much bigger sacrifices than Greece or Spain. In Latvia, for example, not only the fiscal deficit was eliminated much more quickly, but the cuts in wages were stronger than in the Southern European countries. I do not think Greece can complain on that account.

The Baltic countries are smaller than the Southern European ones and have a different historical background. As former-Soviet states, they got used to bad times and making sacrifices, hence, they might be able to endure more than Greece, where people have had a higher quality of life.

I find this argument a little bit strange. We should treat the Greeks more gently and make a slower adjustment just because they have not been that much tempered? Contrarily, we can demand more from the Baltic states just because they have suffered more? In my view, the opposite is true. The quicker you do the adjustment, the quicker the recovery will be and the quicker people will get through it. That is what the Baltic countries have done and their results speak for themselves.

Have the austerity measures taken place in Southern European countries achieved their goal?

I think austerity was not as much imposed as originally planned. However, the adjustment of expenditures to incomes has happened at very large extend. You can see it – not from the fiscal accounts but – from the current account balances which are about in equilibrium. These countries now do not need any foreign capital to finance their investments, which is an important first milestone.

Still it has just turned out that Greece will need a second aid package in order to avoid insolvency. What effect will this news have on the outcome of the upcoming German federal election?

This second package – we are talking about 10 billion – is negligible compared to the 200 billion which the Greeks got earlier to hand: an error of 5 percent. In my opinion, this small change and will very little affect the outcome of the elections and has little to do with the question whether the package is working or not. The real outcome of this crisis will be known in five to ten years.

Is it true that without transfers it is impossible to handle the situation in Southern Europe?

You cannot revive an economy just with transfers and credits. If you had a war and the infrastructures had been destroyed, it would make sense to get some transfers in order to rebuild it. But this is not the case of Greece or Spain. What they need is not roads, airports, and factories but to export more, import less and consume less. This problem cannot be addressed by more money from the outside; this is an internal adjustment process which has to take place within Spain and Greece. Credits and transfer should only be used for facilitating this process.

Franz Nauschnigg from the Austrian National Bank told me recently that the problem could be solved if the euro was weaker against the Chinese currency and the US dollar. Do you agree with that?

The euro’s value has not been right for the last years; but it has always been the case. Ten years ago, it was too strong for Germany and too weak for Spain. Now, it is the other way around. It is too strong for Spain and Greece and it is too weak for Germany. However, the key point is that the Eurozone has developed a current account surplus which is larger than that of China – despite the strong euro.

In Hungary, most of the people seem to get more and more skeptical about the European Union. In some other countries, such as Poland, the Czech Republic and Great Britain, it has also been suggested that they should exit the union. Is there really a conflict between the EU and national interests? Do you believe that this dissatisfaction could lead to the dissolution of the EU?

Yes, of course, there is a conflict. Those who think that different policies are better should try it. If Hungarian people think that they are better off outside the EU, bye-bye, you can leave anytime, nobody will keep you in! It is apparent that they get much more support from the EU compared to the sacrifices they have to make in return. I don’t see such danger anywhere else. Research shows that the Europeans, including the majority of the politicians, wish the existense of the union and the deepening of the integration, even if became general that if there are big problems they blame the EU and if things are going well, they praise their national policy makers. All in all, it is a serious issue but I do not think that it will lead to the dissolution of the union.